The More Money We Come Across, the More Problems We See…

Recently, I’ve noticed support for a few new innovative solutions in fundraising for development. Duncan Green supports a Tobin Tax for development (a small tax on international currency transactions which when aggregated across many transactions, would result in a large windfall for development), and reports that Pittsburgh G20 provided a small, qualified triumph in getting it on the agenda. Another item that’s been in the news is the ‘plane ticket tax’ for development, which Matt reported on. These are of course, on top of the existing G8 commitments on increasing aid for development made at Gleneagles a few years back.

This all begs a question: where is the analysis that tells us that the constraining factor in reducing poverty is aid funding? I can’t think of any really robust, legitimate analyses that say what is really holding us back is not having enough money to spend on development activities. Nor can I think of any shout-from-the-mountaintop successes that have roll-outs languishing on the proposals shelves because the funds simply can’t be found.

The argument for more money is not based on an analysis of the constraints to development. Rather, it seems to be based on a feeling that we can give more, we can forego more; and given how much people are suffering, we really ought to. It’s a commendable and moral impulse. It’s also wrong. Before we start appealing for more money much more needs to be gotten out of money we currently do have. Getting this the wrong way round may actually hamper efforts for development, rather than help.

At the risk of pissing off the fundraisers on the one hand, and the ‘no shit, Sherlock’ brigade on the other, I propose a short list of what comes before asking for more money below.

1) Coordinate Country Aid Allocations Internationally

At present, most donors appear to make their funding decisions based on the assumption that their aid is the only aid (as Matt has pointed out before). If all donors decide to fund the same countries, the marginal benefit of each additional unit of aid there will plummet, while in other countries it remains very high. Better coordination will ensure we get the most out of our aid.

2) Understand the Biggest Problems

I recently pointed out that a great deal of economic analysis of Africa, and by consequence much of the policy that has been recommended, labours under the misapprehension that most African countries are capitalist, and need their systems fine-tuned to harness the power of capitalism. In fact, if you spent a while looking at the underlying structure of the economy (ownership; access to capital; resource spread) you’ll find that many are mixed economies with capitalist and pre-capitalist characteristics that need to transform into capitalisms. Diving into the aid market without examining your preconceptions can lead to a lot of wasted money.

3) Coordinate Sector Allocations at the Country Level

Donors cluster. This has been the case for a very long time, and despite all of our talk about division of labour and specialisation in aid, it’s not changing nearly fast enough. The effect of this is massive over-funding in certain sectors while others gasp for aid. An old colleague of mine in Malawi calls these neglected sectors ‘donor orphans’, in comparison to the ‘donor darlings’ of HIV/AIDS, Governance and so on. Economics (and indeed basic common sense) tells us that we need to focus on constraining factors. Clustering prevents this, and means a lot of aid focuses too narrowly to support the overall development of the country. It’s like a patient turning up to hospital with two bad gunshot wounds: if all the doctors focus on the one in his shoulder, they might patch it up beautifully. Meanwhile, he’s dying from the wound in his stomach that they’re neglecting.

4) Coordinate Projects at the Country Level

Sometimes, even when sector allocations are reasonably well coordinated, within a sector you’ll find two donors doing the same thing, without any additive effects. In other cases, you’ll find three worthwhile projects in different regions running at the same time, requiring the same scarce resources. I remember being told of a situation in Malawi where the same two civil engineers (excellent ones, by all accounts) were employed in three regions on three different projects concurrently. They were too thinly spread to give any their full attention and all three projects wound up over-running. This could have easily been avoided if the projects had been better sequenced.

5) Make Sure What You’re Funding Has an Impact – and Learn From It

File this one under ‘I can’t believe I have to say this’. Yet everyone who works in aid has seen donors give large sums of money to pointless, frivolous or damaging projects. Equally badly, many projects don’t undergo any proper evaluation or monitoring. In my opinion, unless a project is solely for alleviating suffering short term (and this should only be done for humanitarian crises) they should be designed and monitored to maximize the chances of them having a long term effect. This means you need to go back and look at the effects two, three, even five years after the project has finished and see if the effects are still visible. Whether or not they are, you should learn something – which should then inform your future planning.

6) Use the Money Efficiently!

Another no-brainer, but it is a recurring problem in donor-funded projects: inflated consultants fees, expensive goods and materials, excessive administrative burdens; all are common. Today’s Aid Watch post is by Frank Wiebe, Chief Economist at the Millennium Challenge Corporation. He argues that all aid should be measured against a Cash Transfer standard: if less than 73% of the original value of the project gets to the recipient, it should be trashed. I don’t buy this, because some activities with a major long-term impact may require significant management oversight, and a well-managed project is a valuable thing, but the sentiment is spot on. We need to make sure that even if only 50% of the money reaches the recipient, those things we are spending on are done to a high a standard of value-for-money as possible.

Given that all of these things are painfully obvious, why are so many of us still chasing money before dealing with them? I think there are two reasons. Firstly, many people want to help, to do something tangible for those in less fortunate situations. Giving or raising money is easy, tangible and direct: one has either directly given the money out of their pockets or raised it through advocacy. That feels a lot more concrete than making a smaller contribution to the global efficiency of aid, which in any case is something that not everyone can do. There are only so many reasonable jobs in development and only space for a finite amount of advocates.

The second reason is more cynical: plain laziness. It’s probably easier to raise money than fix the systemic problems in aid; and most people probably think that spending $100 million inefficiently is still more useful than spending $30 million and getting good value for it.

I disagree. Strongly. I believe that getting things right will improve static and dynamic effects of aid and make a much bigger difference than raising more money will. The problem is, with new money always flowing in it’s very difficult to motivate this change.

Ranil Dissanayake

Shouldn’t “it’s the capitalism stupid” should be number one? You well know the predominant SOAS line (which I have adopted more or less uncritically spending most of my energy trying to understand it not critise it :-)): the World Bank et al should be doing banking, the rest encouraging capitalism. Everything else is.. well.. lets say not as important.
Co-incidentally started reading this… http://www.monthlyreview.org/799saul.htm
.. this morning. On SSA: “there is some capital but not a lot of capitalism. The predominant social relations are still not capitalist, nor is the prevailing logic of production.”

PS the RMF website is not really “my” website.. still if it garners a few more hits…

Ranil Dissanayake

October 2, 2009 at 6:51am

Duncan – thanks for the article, looks interesting. I just read the intro, will read the rest this weekend.

I had a reason for not putting the capitalism first: I don’t think it’s true everywhere in the developing world, nor even in Africa. South Africa is capitalist, and parts of Kenya are, too. So the point about organising what countries you’re going to focus on comes first.

I’m actually reading a lot about the economic and political development of Africa at the moment, and coming to the conclusion that the roots of the failure to develop into capitalism are not only in the complex evolution of identity and patron-client networks, but also in population evolution, including post-colonial internal migration and urbanisation. Will try and put all that into some coherence for a future post.

As a finance economist – what do you think of the Tobin Tax for development? Even assuming we need more money, good idea?

Andy Stevenson

October 2, 2009 at 10:39am

Good post Ranil, I agree wholeheartedly. I’d be interested to hear your opinion on something regarding the “Use Money Efficiently!” point though.

Given that a) a great deal of aid is given directly to government institutions and b) government institutions (e.g. Ministry of Education, National Aids Commission in Malawi) are often extremely inefficient in their use of funds and rather poor at transmitting value to the intended recipients, is it possible to significantly improve donor spending efficiency without reducing the role of government as an implementer?

The typical response is no, government capacity (if not actual size) should be increased to the point that they can make efficiency improvements themselves. I agree to an extent, but also recognise that sustainable, institutional capacity building is, realistically, a long-term process. Until this process reaches a relatively advanced stage (if indeed it happens at all), enormous amounts of money are wasted due to poor management and poor delivery.

Ranil Dissanayake

October 2, 2009 at 11:55am

good point.

First thing, is that Government capacity *should* be strengthened. But that isn’t the primary cause of these problems. Procurement isn’t rocket science and applying basic efficiency criteria shouldn’t be beyond anybody’s ken.

Rather the problem is that the incentives to work hard to save money on the aid programme are minimal for your average Government officer: staff are ludicrously underpaid and under no real threat of sanction if they perform poorly. As in most civil services, it’s virtually impossible to sack anyone for poor performance. In such a working environment, who would spend 8 hours chasing people down and negotiating to cut the costs of a purchase or making sure that the project delivers as much as humanly possible? Sure you get some remarkable people who work that hard for almost nothing because they care. But not that many.

A big part of the answer in my opinion is this: increase the salaries (double them even, in Malawi’s case), but at the same time, introduce real accountability for performance with real sanction. People will value their jobs and need to work hard to hold on to them. If there remain skills gaps, train people.

This may require cutting the size of the civil service. Given that in most Government’s I’ve worked in for some length of time (4 and counting now!) many people do little or nothing on the payroll, that’s not necessarily a problem, as long as it can be done on merit rather than connections (which is difficult, admittedly).

A final point to make is that the use of Government as a channel of aid is not primarily justified on efficiency grounds. It’s also for dynamic effects: if the Government implements a project and believes in its objective and functioning, it’s far more likely to have some impact or be maintained beyond the window of donor funding. Given this, I’d say that comparing donor efficiency and Government efficiency is apples and oranges, and we should be focusing on using Government delivery mechanisms as efficiently as possible.

Andy Stevenson

October 2, 2009 at 3:42pm

Ranil – thanks for the quick response.

You said in your first post, in reference to global fundraising: “Getting this the wrong way round may actually hamper efforts for development, rather than help.” I agree, and would suggest that this is already happening at a country-level, where government institutions are flooded with more cash than they are able to spend effectively. A large chunk of this money is lost to inefficiency (for the reasons you explain), while acting as a brake on wider governmental reform.

We should, absolutely, “be focusing on using Government delivery mechanisms as efficiently as possible”. We also need to accept that these mechanisms (particularly those around effective institutional culture) take a long time to grow. During the transition, which can take many, many years, government programming will continue to be slow, inefficient and uneven, leaving many of the intended beneficiaries (schools, PLHAs, hospitals, civil society) unsupported.

Ranil Dissanayake

October 5, 2009 at 9:04am

Yup – I think you’re right that too much is going to Government. It could definitely do with a scaling down of aid. however, I don’t think the necessary accompaniment to that would be increasing aid directly to beneficiaries. My suspicion is that would (in most cases) entrench a different set of problems. Obv. there are some things (like drugs, electricity, materials) that can be supported directly, the longer the donors do that kind of thing, the less motivation there is for the Government to build it’s own ability to do them.

Plus, as Duncan says, the big issue is the capitalism; until that gets done, everything else needs support in perpetuity because tax revenues will never be high enough to provide the necessary services. And that should be what we are aiming for: a country that is self-administered and run out of its tax revenues and financial market dealings.